10 October 2014 06:07 am
By Dilina Kulathunga
The country’s Treasury Secretary yesterday asked the pensioners who live on interest received on fixed deposits to invest their money in the stock market as going forward, further lowering of interest rates is inevitable.
According to Dr. P.B Jayasundera, country’s burgeoning capital market offers an attractive investment alternative for those suffering from lower interest rates on their
bank savings.
“We can already see some concern over low interest rates by those who live on interest income from traditional savings for which the capital market could provide alternative opportunities,” said
Dr. Jayasundera addressing Sri Lanka’s first post-war international capital market conference.
In Sri Lanka, a large number of retirees live on interest received, having put all their retirement benefits in bank fixed deposits, as they consider banks offer them a safer option to any other investments out in the market.
However, with the Central Bank lowering their key policy rates to multi-year lows in recent times, commercial banks have reduced their deposit rates at a faster pace than the lending rates, leaving pensioners highly vulnerable.
According to recent Central Bank data, Sri Lanka’s one year fixed deposit rate has dropped to 8.18 percent by end August from 12.82 percent a year ago.
It was only recently the Central Bank Governor Ajith Nivard Cabraal asked pensioners to put their moneys into business startups and also to stat new ventures with their retirement benefits, a proposition which led to debates given the appropriateness of the suggestion, given the ability to take such high risks by them.
According to professional fund managers, when providing investment advisory to the retirees, they are usually advised to invest their savings in fixed income securities as they are unable to take risks when they grow older.
However, Dr. Jayasundera said although money interest rates are low, the real rate of interest is higher due to low inflation prevailing but told this theory is hard to sell.
“Economic theory of course argues that, the real rate of interest is what matters. This is hard to sell until money illusion disappears, that is the tendency of the people to think of currency in nominal or the face value terms rather than in real terms or in terms of purchasing power,” he explained.
When an economy moves into an advanced status it is natural that the nominal interest rates trend downwards.